THE PURCHASE ORDER PROCESS
5. ELECTRONIC PURCHASE ORDER PROCESS
5.2 E-Procurement or e-Commerce
The center portion of Figure 4-3 has a significant percentage of the total dollars with relatively few transactions. The expenses here are characterized by having a wide variety of items grouped into a dozen or so broadly defined commodities or part families, frequently purchased from distributors and catalog houses. Examples include Maintenance, Repair and Operating (MRO) supplies, office supplies, mill supplies, computer peripherals, office furniture, plumbing supplies and electrical supplies. Chapter 16 will address these unique purchases in more detail, so as to keep the current discussion focused on general procurement procedures.
Many astute purchasing departments have implemented e-procurement applications to deal with this portion of the indirect material spend. There is a broad spectrum of e-procurement software and systems available today and it is growing rapidly. No single supplier or approach is endorsed here, as the selected course must mirror the specific need. Therefore, the basic procurement process is described and the selection of application software is left to the practitioner.
The essential elements of an e-procurement solution include:
Supplier agreements for an array of frequently used products (essentially a contract to buy from the supplier’s catalog) usually with preferred pricing levels
Supplier catalog management or aggregation software
Internet portals to connect buyer and seller via the Web, supported by Internet browser capability for both
Ordering and fulfillment processes (workflow) for buyer and seller
Receiving and tracking systems Invoicing and payment systems
Exception reporting and dispute resolution
Historically, electronic component distributors initiated the first e-commerce solutions to gain competitive advantage with their customers. As a means of creating a discriminating “funnel”, they would provide aggregation of their catalog, portals for connecting buyer to seller and ordering workflow software. Sometimes they could also offer receiving and payment systems, but usually this required a large amount of customization to suit different customers. There were two substantial limitations with these early efforts—(1) the buyer had to deal with a unique system interface (Web browser look and feel) from each supplier and (2) once in place, purchases could be made using the system only from the supplier whose catalog was installed.
Suppliers of e-procurement application software now offer standardized catalog aggregation, a single user interface (one look and feel for all suppliers), built-in rules-based workflow management, receiving, invoicing and exception reporting. All of this comes at a price, however, often more than a million dollars for a comprehensive system. The return on investment can be difficult to rationalize, unless the buying organization has the means to accurately measure and to reduce its transaction costs as a result of the e-procurement installation. This last area is particularly daunting because it involves displacing people to perform other work, or outright headcount reductions. Another concern when implementing an externally provided e-procurement solution is the required interface with legacy systems, such as Enterprise Resource Planning (ERP), accounts payable or inventory management systems. This discussion covered indirect spending, but when using e-procurement systems for direct, or product bill-of-material purchases, the interface with internal ordering and inventory management systems is critical to customer service.
Supply management organizations that have successfully implemented e-procurement systems cite the following advantages:
Faster PO processing tune
Reduction of transaction costs to less than $10 per transaction Reduced off-contract spending activity and increased buying volume leverage
Faster catalog searches, availability checks and requisition processing times
Ability to closely track progress of delivery, receipt and payment Improved supplier relations (regular orders and prompt payment)
Reduced contract creation cycle time
More detailed purchase history and more frequent reports
Improved internal relations (primarily from end-user control and ease of use)
Immediate availability of price quotes on first-time purchases Ability to track open order commitments
Analytical tools to interpret spending patterns and manage future spending
Enabling of comprehensive supplier performance tracking
With all these advantages, the question may rightly be asked, “Why hasn’t there been a stampede to implement e-procurement?” And the truth is there are many valid reasons to proceed with caution.
Those cited most frequently are:
High cost of application software and questionable (i.e., not “bullet-proof”) ROI
Difficulty of integration with existing legacy systems
Disruption of existing processes (i.e., the need to re-engineer the process during implementation)
Inherent complexity of supply chain management
Suppliers not capable of transactions over the Internet (though this concern is evaporating rapidly as technical, cost and firewall issues have largely been resolved.)
These valid concerns are important when contemplating any e-commerce project. But there are many ways to mitigate the risks and undertake projects in an orderly way that will increase the likelihood of success.
Because of their impact on the entire purchasing process within an organization, all e-procurement efforts should be part of an overall business and e-commerce strategy. The procurement strategy should be long-range, typically from two to five years. Within this strategy there will likely be several stages and individual projects.
Work with the information systems staff to assess the organization’s overall readiness by looking at the number of employees with Web access and browsers.
How familiar is the potential user base with dealing with others over the Internet?
Are in-house systems in place that will facilitate buyer to supplier communication?
Is the supplier base narrowed to preferred suppliers for families of similar items?
If the organization is Internet savvy already (and if not, this in itself should be a red flag!), build a list of desired features and evaluate the many suppliers of software and Internet services available to provide those features. It should be possible to find a supplier with excellent alignment to your specific needs from the large number of alternatives.
The following list contains some “nuts and bolts” suggestions for those with no experience to begin buying on the Web:
Build upon an existing Electronic Data Interchange (EDI) ordering process, if such a system is in place, by moving the EDI transactions to the Internet using Extensible Markup Language (XML).
Take advantage of existing supplier e-commerce capabilities.
Set up Web browsers in purchasing or in using departments to directly access suppliers’ sell sites.
Connect to supplier sales site to conduct buying transactions.
Arrange payment using a purchasing card.
Expand legacy systems to include e-procurement applications.
Add or activate an e-procurement module in the ERP package.
Include ERP modules for Receiving and Accounts Payable.
Record transactions electronically at the point of commitment, or order placement, to build a purchase history file.
Collect and analyze spending patterns from order entry files.
Set up an in-house catalog of similar items that are purchased frequently.
Review current contracts for distributor type items.
List similar items with contract pricing on a spreadsheet.
Group the items by part family and by supplier.
Create electronic requisition forms to be populated by using departments from the spreadsheet.
Join a buyers’ online marketplace (buyer-centric market) where buyers, usually from a single industry, work together to offer their requirements for suppliers to post bids. An example of a buyer-centric marketplace is Covisint, in the automotive industry. Note, however, that Covisint currently appears to be changing its focus toward collaboration and away from simple trade facilitation.
Use a net marketplace (seller-centric market) where sellers from a particular industry offer goods for sale via the Web. An example of this is the chemicals industry. Be aware that this is akin to the seller making an unsolicited offer and is probably not priced very competitively.
Set up an on-line reverse auction for bidding a family of similar items together over the Internet. While it is possible to do this on your own, it is recommended that you consider contracting with an experienced facilitator.
Attend a seminar on buying over the Internet. Many are available online, by Webcast and face-to-face, from such organizations as ISM.
Once the e-procurement process has become well established, it will probably make sense to expand its use to smaller value purchases, where the electronic system can displace the less controlled p-card transactions. The arrows in Figure 4-3 note the intention to increase usage of the e-procurement process in this way. Eventually it may make sense to apply the electronic process to larger value items as well, but don’t overlook the need for close personal attention to these high impact transactions.